Stewardship is part of our ethos. However, we have never taken a holding with the intent of advancing a corporate agenda. We buy because we believe that the companies are already concerned with being long-term in approach. We believe the portfolio companies concentrate on building a competitive moat and flourish by having a purpose beyond shareholder value. This is our focus. We don’t search for problems to solve; this cuts against the processes of Scottish Mortgage.
This attitude means we are committed to the individual companies in which we invest. So, for us, engagement is a combination of confidence in the company and in our processes, but also an admission that bad things happen in the natural course of events. We strive to get to know our investments well enough that problems are neither a surprise nor so destructive of former hypotheses that exit is the only response.
When does support need to be more voluble? When does it need to come with substantial provisos or even requests for change? Often this is a reflection of little more than noise levels surrounding our shareholding. Will we push Under Armour far enough in addressing its problems? Or try to engage Alphabet on matters of tax? I think perhaps we are potentially more influential and more visible in some cases than others.
What is common in these cases is that we explicitly decided that there was a growth opportunity and a competitive moat worth investing in for the long term and hence worthy of time and effort. This isn’t always popular.
I’d advocate more open discussion of whether we think avid engagement is justified. It isn’t always so. Being willing to admit that there have been disappointments relative to the earlier hypotheses is healthy. Again it’s an acceptance that bad stuff, both events and managerial, happens. Engagement beats rage, head in the sand denial or exit when there is a business worth saving.
Occasionally, engagement is forced upon us by takeover activity. Two instances stand out in my memory. First SoftBank’s successful acquisition of ARM last year and the second, Roche’s failed bid for Illumina.
With ARM, it was with great sadness that we voted in favour of SoftBank’s proposed acquisition of ARM. We were inclined to resist the deal. We felt it undervalued the future growth in demand for ARM’s products. But after conversations with the Chairman, the CEO, the Finance Director, the Senior Independent Director and mostly critically, the Chief Technology Officer, we came to the view that acceptance was the right course of action. ARM did not possess the willpower, nor the resource to turn its potential into actuality over the next decade. ARM, sadly, were nervous about the scale of the investment required, the risks that needed to be embraced and the patience that would be required of markets. SoftBank, however, had the ambition and the confidence to address these challenges.
The outcome of the attempted hostile takeover of Illumina by Roche was different. Here, the timeframe of returns and the probabilities related to the outcomes were the central issues. Roche management, we felt, were only looking out quarters ahead. Our timeframe was decades. This engagement proved a real step forward for us. By fighting against Roche to secure Illumina’s independence, we obtained traction in a challenging sector by gaining access to smart management teams and potentially transformational companies.
Moreover, we ought to be able to make our views heard before issues we care about arise. An example would be Atlas Copco. This company derives a substantial portion of revenue from making machinery energy efficient. We have been speaking to them about the long-run impact of near free energy on their business. This is an example of quiet engagement being preferable. But that cannot be an excuse for inaction or shying from inevitable public moments.
I don’t think it’s entirely appropriate to look for general rules in engagement beyond a few fundamental principles. The specifics of the situation and company are paramount – perhaps unhappy companies are different in unique ways. This is why a rules-based approach makes me nervous.
Outstanding companies are not nails to be hammered down because they dare to dissent from normalised mechanisms. Or, to put it another way: culture and organisation should be reflections and reinforcements of business models that favour radicalism, innovation, deep competitive moats. Rewarding convention isn’t our role, we should avoid thinking one size fits all. You don’t build differentiation and enduring competitive advantage by imitating others or obeying sacred texts.
But these cautions aside, I’m convinced that serious commitment and engagement have extraordinary benefits for our investing skills and for companies. These are a set of flywheels that mesh unusually well – if we treat companies more thoughtfully then they will treat us more seriously and thus we become better investors – engagement requires long-term perspective.
It’s absolutely no good talking about support and then rushing away at the first sign of trouble. We can all support companies doing well and going up in a straight line. That proves little. You earn respect at the tough moments. We should acknowledge when there are discouraging and problematic events but be emboldened when we think that with time, effort and thought we can help improve the situation. There is nothing like going through hard experiences to build muscle and repute. This includes an acceptance that abrupt falls in price are frequently the immediate fruit of stewardship – turning down takeover offers isn’t always popular.
Lastly, we should be blunt about acknowledging our limitations. By trying to do too much we go beyond our skills and we distract ourselves from what we can contribute. I’d advocate that we have but two guidelines. We should only be interested in making companies longer-term and in helping dig better moats. The rest is noise.
The views expressed in this article are those of James Anderson and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved on the stated date and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies. Scottish Mortgage Investment Trust PLC (Scottish Mortgage) is listed on the London Stock Exchange and is not authorised or regulated by the FCA. The value of its shares, and any income from them, can fall as well as rise and investors may not get back the amount invested.
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James has been the Manager and then Joint Manager of Scottish Mortgage Investment Trust since 2000 and is a co-manager of the International Concentrated Growth Strategy. He Chaired the International Growth Portfolio Group from its inception in 2003 until July 2019 and remains co-manager of Vanguard International Growth. In 2003, James also co-founded our Long Term Global Growth Strategy. Prior to this, he headed our European Equity Team. James has served as a member of the Advisory Board of the government sponsored Kay Review and as Chair of the subsequent industry working group that set up the UK Investor Forum. He joined Baillie Gifford in 1983 and became a Partner in 1987. James graduated BA in History from the University of Oxford and after postgraduate study in Italy and Canada he gained an MA in International Affairs in 1982. He is a Trustee of the Johns Hopkins University.